3.3 Moving Forward

Learning Objectives

Detail how Zara’s approach counteracts specific factors that Gap has struggled with for over a decade.

Identify the environmental threats that Zara is likely to face, and consider options available to the firm for addressing these threats.

The holy grail for the strategist is to craft a sustainable competitive advantage that is difficult for competitors to replicate. And for nearly two decades Zara has delivered the goods. But that’s not to say the firm is done facing challenges.

Consider the limitations of Zara’s Spain-centric, just-in-time manufacturing model. By moving all of the firm’s deliveries through just two locations, both in Spain, the firm remains hostage to anything that could create a disruption in the region. Firms often hedge risks that could shut down operations—think weather, natural disaster, terrorism, labor strife, or political unrest—by spreading facilities throughout the globe. If problems occur in northern Spain, Zara has no such fallback.

In addition to the operations vulnerabilities above, the model also leaves the firm potentially more susceptible to financial vulnerabilities during periods when the euro strengthens relative to the dollar. Many low-cost manufacturing regions have currencies that are either pegged to the dollar or have otherwise fallen against the euro. This situation means Zara’s Spain-centric costs rise at higher rates compared to competitors, presenting a challenge in keeping profit margins in check. Rising transportation costs are another concern. If fuel costs rise, the model of twice-weekly deliveries that has been key to defining the Zara experience becomes more expensive to maintain.

Still, Zara is able to make up for some cost increases by raising prices overseas (in the United States, Zara items can cost 40 percent or more than they do in Spain). Zara reports that all North American stores are profitable, and that it can continue to grow its presence, serving forty to fifty stores with just two U.S. jet flights a week (Tagliabue, 2003). Management has considered a logistics center in Asia, but expects current capacity will suffice until 2013 (Rohwedder & Johnson, 2008). Another possibility might be a center in the Maquiladora region of northern Mexico, which could serve the U.S. markets via trucking capacity similar to the firm’s Spain-based access to Europe, while also providing a regional center to serve expansion throughout the Western Hemisphere.

Rivals have studied the Zara recipe, and while none have attained the efficiency of Amancio Ortega’s firm, many are trying to learn from the master. There is precedent for contract firms closing the cycle time gap with vertically integrated competitors that own their own factories. Dell (a firm that builds its own PCs while nearly all its competitors use contract labor) has recently seen its manufacturing advantage from vertical integration fall as the partners that supply rivals have mimicked its techniques and have become far more efficient (Friscia, et. al., 2009). In terms of the number of new models offered, clothing is actually more complex than computing, suggesting that Zara’s value chain may be more difficult to copy. Still, H&M has increased the frequency of new items in stores, Forever 21 and Uniqlo get new looks within six weeks, and Renner, a Brazilian fast fashion rival, rolls out mini collections every two months (Pfeifer, 2007; Rohwedder & Johnson, 2008). Rivals have a keen eye on Inditex, with the CFO of luxury goods firm Burberry claiming the firm is a “fantastic case study” and “we’re mindful of their techniques” (Rohwedder & Johnson, 2008).

Finally, firm financial performance can also be impacted by broader economic conditions. When the economy falters, consumers simply buy less and may move a greater share of their wallet to less-stylish and lower-cost offerings from deep discounters like Wal-Mart . Zara is particularly susceptible to conditions in Spain, since the market accounts for nearly 40 percent of Inditex sales (Hall, 2008), as well as to broader West European conditions (which with Spain make up 79 percent of sales) (Rohwedder, 2009). Global expansion will provide the firm with a mix of locations that may be better able to endure downturns in any single region . Recent Spanish and European financial difficulties have made clear the need to decrease dependence on sales within one region.

Zara’s winning formula can only exist through management’s savvy understanding of how information systems can enable winning strategies (many tech initiatives were led by José Maria Castellano, a “technophile” business professor who became Ortega’s right-hand man in the 1980s) (Rohwedder & Johnson, 2008). It is technology that helps Zara identify and manufacture the clothes customers want, get those products to market quickly, and eliminate costs related to advertising, inventory missteps, and markdowns. A strategist must always scan the state of the market as well as the state of the art in technology, looking for new opportunities and remaining aware of impending threats. With systems so highly tuned for success, it may be unwise to bet against “The Cube.”

Key Takeaway

Zara’s value chain is difficult to copy; but it is not invulnerable, nor is future dominance guaranteed. Zara management must be aware of the limitations in its business model, and must continually scan its environment and be prepared to react to new threats and opportunities.

Questions and Exercises

The Zara case shows how information systems can impact every single management discipline. Which management disciplines were mentioned in this case? How does technology impact each?

Would a traditional Internet storefront work well with Zara’s business model? Why or why not?

Zara’s just-in-time, vertically integrated model has served the firm well, but an excellent business is not a perfect business. Describe the limitations of Zara’s model and list steps that management might consider to minimize these vulnerabilities.